Legislators hope to bypass court-ordered debt payment with new law

SACRAMENTO -- Can California legislate its way out of a $331 million court-ordered debt? That's what plaintiffs in a long-running legal case say Democratic lawmakers are trying to do with a pair of nearly identical bills introduced this week.

SB 861 and AB 1829 appeared in print on Tuesday, about a month after an appeals court ruled the state illegally appropriated money from a multi-million dollar mortgage settlement to pay off bonds and backfill the general fund.

Each bill passed its initial budget committee votes on Wednesday and Thursday, respectively, over Republican opposition.

Both "would provide legislative confirmation and ratification that allocations of funds from the National Mortgage Special Deposit Fund in the 2011-12, 2012-13, and 2013-14 fiscal years were consistent with the direction given to the Director of Finance."

What this language means in practice is the state is seeking to circumvent a unanimous ruling issued last month by the 3rd District Court of Appeal. National Asian American Coalition et al. v. Brown et al., 2018 DJDAR 6755 (Cal. App. 3rd Dist., July 10, 2018).

"Gov. [Jerry] Brown is being sneaky," said Faith Bautista, the coalition's president. "We've been waiting patiently since 2014. We went through the process and won. I don't know why the Legislature would entertain this when he's [Brown] out of the door. No matter what, they have to pay this back."

The case started with a $25 billion, 49-state settlement with the five biggest mortgage servicers in the country reached in 2012. Of this, $20 billion was set aside to compensate homeowners who had suffered illegal foreclosures or other abuses.

California received $410 million. Then-Attorney General Kamala Harris issued a directive that the money be used for programs that "keep people in their homes."

But the money came amid the budget shortfalls that followed the financial crisis. Brown and the Legislature raided the fund to pay off bonds issued for low-income housing programs and to backfill the general fund -- moves Harris repeatedly criticized at the time.

The coalition and allied groups sued and won in Sacramento County Superior Court in 2015. Judge Timothy M. Frawley ruled the plaintiffs had standing and found lawmakers violated the intent of how the money was to be used.

Last month, a 3rd District Court of Appeal panel found that some of the $350 million taken was used for appropriate purposes. But it ordered the state to repay $331 million.

Department of Finance analyst Josh Gauger defended the new bills in a state Senate budget committee this week. He noted the state has filed a notice of appeal to the California Supreme Court, but the court would not rule before the end of the legislative session on Aug. 31.

Both bills "clarify" the Legislature's intent when it passed the law creating the state fund, he said.

"Once the Legislature passes this legislation, the courts would recommend the underlying basis for the opinion would be abrogated," Gauger told the Senate Budget Committee on Thursday when it heard AB 1829.

"The current opinion hinges on the finding that [the Department of] Finance misinterpreted the original legislative direction," he added.

This appears to be a reference to a line included in the state Government Code: "Notwithstanding any other law, the Director of Finance may allocate or otherwise use the funds in the National Mortgage Special Deposit Fund to offset General Fund expenditures in the 2011-12, 2012-13, and 2013-14 fiscal years."

But the 3rd District ruling said the court was "not persuaded" by the "notwithstanding any other law" argument.

This was in part because the code section "makes reference to the former attorney general's successful negotiation of the national mortgage settlement. ... [I]t is only reasonable to conclude the Legislature intended the specific purposes set forth in the former attorney general's instructions are also the purposes for which the NMS Deposit Fund money may be spent."